Farm Sector Performance and Reform Agenda

Author(s): Rip Landes and Ashok Gulati

Source: Economic and Political Weekly, Vol. 39, No. 32 (Aug. 7-13, 2004), pp. 3611-3619
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 Bpecial articles

Farm Sector Performance

and Reform Agenda
Recent political changes in India have brought back agriculture to the centre stage of policy
discussions. How long it stays there is yet to be seen. But it would be worth analysing the
structural and policy-induced changes in agriculture since the reformsstarted in 1991, and try
to build a political consensus on the reform agenda that can put agriculture on a higher
growth trajectory, makes it globally competitive and enables the masses to share in its gains,
and is also sustainable in the long run. This paper is an attempt in that direction.
RIP LANDES, ASHOK GULATI

achievementof consensusonreformcouldhavepositiveimpacts
Introduction on the performanceof agriculture.

D uring 1991-93, India introduced major reforms to indus- II

trial, trade, and exchange rate policy that helped spark
India's emergence as one of the fastest growing deve-
loping countries. Since 1990, annual GDP growth has averaged
5.6 per cent and consumer price inflation has averaged just
8 per cent, with performance on growth and price stability even
stronger in more recent years. External accounts, previously a
chronic weakness of the Indian economy, have turned robust,
with rising exports and current account surpluses pushing
foreign reserves to more than $100 billion. Most importantly,
the share of the population in poverty has dropped from 39 per
cent in 1987-88 to 26 per cent in 1999-2000 [Government of
India 2003a].
The 1991-93 reforms, and the growth they have spawned, have
created pressures for change in agriculturalpolicy. Food demand
is growing and diversifying, in turn placing new demands on
marketinfrastructureand institutions. Long-standing production,
procurement,and distributionprogrammesfocused on foodgrains
are increasingly expensive and out of step with market demand.
Burgeoning subsidy outlays are constraining public investment
in transforming institutions and market infrastructure, while a
thicket of regulation appears to be restricting private agribusiness
investment. And, despite improved growth in the overall
economy, growth in farm output and, particularly,ruralemploy-
ment is slowing.
There have been some important changes in agricultural
policy since the early 1990s, including removal of quanti-
tative trade restrictions required by the Uruguay Round
Agreement on Agriculture (URAA), and initial steps to pare
down regulation of domestic input and output markets. The
recent elections have sharpened the focus on the performance
of agriculture, but political consensus for fundamental reform
in agriculture has, in the past, been elusive. The goals of this
paperare to survey the performance of agricultureand agricultural
policy since the 1991-93 reforms, and identify key areas where
Impactof Non-Agricultural
Reforms
on Agriculture
The macroeconomicreformsof 1991-93havehadat leasttwo
importantimpactson the agriculturalsector.First,deregulation
of industry,moreopen trade,anddevaluationarewidelyagreed
to have stimulateda significant improvementin the rate of
economic growth, thus strengtheningand diversifying food
demand.Second,althoughdomesticandborderpoliciesdirectly
affectingagriculturewere not includedin the reforms,reduced
levels of industrialprotectionhave improvedincentives for
investmentin agriculturethroughimprovementsin the sector's
domestictermsof trade.
Anadditionalimpactof thereformsmaystemfromthestrength-
ening of the balanceof paymentsand its influenceon policy
priorities.Comfortablereservelevels anda muchmoreresilient
balanceof paymentshaveprobablyallowedpolicy-makersto be
less focusedon agriculturalself-sufficiencyandmoreamenable
to the modest,mostlyunilateral,openingof tradein agricultural
goods that came later in the 1990s.
Rising Incomes and Agriculture
The most importantimpactof the 1991-93reformson Indian
agriculture hasbeenthestrengthening anddiversificationof food
demandresultingfromfastergrowthin percapitaincomes.The
Indianeconomyhas now expandedat an annualrateof 5.8 per
cent(4 percentpercapita)sincetheearly1990s,rankingit among
the fastestgrowingdevelopingeconomiesduringthe period.As
important,fastergrowthwas achievedwhile maintainingprice
stability.Percapitaincomeis nowabout$2,530atpurchasing power
parity[WorldBank2003] and middle-andhigh-incomehouse-
holdsincludingmorethan200 millionconsumersnow comprise
thefastestgrowingcomponents of thepopulation 2003].
[Bijapurkar

Economic and Political Weekly August 7, 2004 3611

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 Figure 1: Growth of Food Consumption in India productsare now showing relatively high, even accelerating
12% - - - - -- - - -. -.- - - -
01970s 01 980s * 1990s growth.
--- - .-
10%-- ---.-------
Strongerandmorediversefood demandis placingnew pres-
8% - - - - - - - - - - - - - - - - - - - - - - - - - - sureson agriculturalpolicy, rangingfromresearchprioritiesto
6% -
the developmentof public and privatemarketinstitutionsand
facilities to efficiently meet these demands.Shifting demand
patterns,when combinedwith official price and inputpolicies
and institutionalinertiafavouringcereals,providethe context
for the costly build-upof wheat and rice surplusesbeginning
in 1997-98.Incontrastto theextensivepublicsectorintervention
4% . . . . . . . .
associatedwiththeachievementof self-reliancein staplecereals,
4-A - - - - - - - - - --
efficientlyservingIndia'sincreasinglydiversefood marketsis
Note: Foodconsumptionbased on nationalproduction,supplyanddistribution likely to involve a primaryrole for privatemarkets,processing
estimates. and investment.
Source: Food and AgricultureOrganisationof the UN, FAOSTATdatabase.

Figure 2: Relative Agricultural Prices and GFCF in India

Improved Relative Prices for Agriculture
35,000 - 1.4
An improvementin the relativeprices facing agricultureas-
30,000 1.3 sociatedwiththe 1991-93reformshasalsohadimportant impacts,
0
25,000 + 1.2 evenwithoutmajoragricultural reforms.Throughthemid-1980s,
i/^ --1.1
Z 20.000
- rj-q policies that protectedindustryand taxed agriculturemeant
:.~ 1.0 relativepriceswerebiasedagainstagriculture.After1990,however,
15,000 1
0.9 S relativepricesturnedin favourof agriculture. Althoughfarm
'i 10,000
0 0.8 policy changeslaterin the 1990s, primarilyhigherwheat and
0
5,000
rice supportprices,likely playeda role in this reversal,reduced
0.7 <
industrialprotectionwas the key factor.
0 0.6
Improvedrelativeprice incentivesin agriculturehave corre-
spondedwith an increasingrole for privateinvestmentin the
sector(Figure2). Thisappearsto havehadsomeimpacton several
Public\ Private-a- Rel Ag Prices sub-sectors,suchas poultryandhorticulture, wheredemandand
GFCF= Gross fixedcapitalformationin and foragriculture. investmentincentiveshavebeenparticularly strong.Totalinvest-
Source: EconomicSurvey,Gol; Ministryof Agriculture,Gol. mentin agriculture,however,remainslow and has shownlittle
dynamism.Comparedwith the averageeconomywidelevel of
Rising incomes, particularly in lower- and middle-income gross fixed capitalformation(GFCF)of about26 per cent of
households where the marginal propensity to spend on food is GDP in 2000-02, agriculturalGFCF was only 16 per cent of
high, are having important impacts on food demand in India. agriculturalGDP. Withinthis total, on-farmGFCFwas about
Middle- and upper-income consumers, as well as urbanconsum- 6 per cent of agriculturalGDP, while estimatedGFCFin agri-
ers, are upgrading and diversifying their diets, and changing culture-relatedactivitieswas about10 percent [Governmentof
the pattern of growth in food consumption. Growth in demand India2003b]. Burgeoningsubsidyoutlaysappearto be curbing
for staple foods, particularly wheat and rice, which have been publicinvestmentin agriculture.And,despiterisinganddiversi-
the focus of agricultural development policy, institutions, fyingfood productdemand,privateagribusinessinvestmentthat
and spending is now slowing (Figure 1). By contrast, demand could strengthenruralemploymentremainslargelyunattractive
for other foods, including fruits, vegetables, fats and livestock comparedwith other sectors.
Table 1: Agricultural Supply and Demand Indicators for India
Period Real GDP DemandIndicators Supply/InvestmentIndicators Real Prices (WPI)
in Real GDP/ Real Yield Relative GFCGin/forAgriculture Total Agriculture Food-
Agriculture Capita Agriculture Index1 Prices2 In For Total GFCF grains
Exports 1981-82=100
GrowthRate3
1982-92 (percent) 3.2 3.1 5.2 2.5 1.3 1.2 2.0 1.6 6.0 1.1 0.3
1992-2001 (percent) 2.9 4.0 7.3 1.2 1.6 2.3 3.0 2.7 6.9 0.5 1.7
1992-97 (percent) 3.4 4.2 14.7 1.4 1.2 2.0 3.2 2.8 7.8 0.7 1.4
1997-01 (percent) 2.3 3.9 -1.3 1.0 2.0 2.6 2.7 2.6 5.9 0.3 2.0
Share of Period Share of Period Period Share of Share of Share of Share of Period Period
GDP Average Ag GDP Average Average Ag GDP Ag GDP Ag GDP GDP Average Average
(Per Cent) (Per Cent) (Per Cent) (Per Cent) (Per Cent) (Per Cent)
1981-83 (average) 39.0 5,987 3.9 104.2 0.99 8.3 10.7 19.0 22.8 99.9 1000
1991-93 (average) 31.7 8,136 4.2 134.0 1.13 6.8 9.5 16.3 24.2 111.4 102.6
1996-98 (average) 27.6 9,972 6.6 143.7 1.20 6.4 9.4 15.8 26.0 115.5 110.1
2000-02 (average) 24.2 11,614 5.4 149.4 1.30 6.4 9.6 16.0 26.1 116.7 119.2
(1) 1981-82 = 100. (2)Agriculture/Manufacturing,
base 1981-82 = 100. (3) Growthrates between 3-yearaverages centered on years indicated(1982 = 1981-83
average, etc)
Source: EconomicSurvey, Gol, variousissues; Ministryof Agriculture,Gol; Handbookof Statistics,Reserve Bankof India, 2002.

3612 Economic and Political Weekly August 7, 2004

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 as wheat, rice, corn, oilseeds, and cotton have all declined 4-6 per
Agricultural Performance cent annually during 1982-2001. Global domestic support,export
Althougheconomic performancehas strengthenedsince the subsidy, and market access policies have contributed to the
early1990s,andlargefoodgrainsurplusesaccumulatedformuch declines in world prices, and some hikes in India's cereal support
of the period,growthin the farmsectorhas weakened(Table1). and marketprices may have been justified by India's earlier bias
In the yearsimmediatelyfollowing reforms(1992-97), agricul- against agriculture. But, broad global price trends are funda-
turalGDP grew about 3.4 per cent annually,but then slowed mentally driven by productivity and marketing efficiency gains
to about2.3 per cent (1997-01). The exact cause of this slump in other parts of the world that are not being matched in India.
remainsa matterof debate and research,and it is difficult to These sector indicators suggest that, despite the strengthening
separatetheimpactsof monsoonperformance fromotherfactors. of demandand improvementsin the sector's termsof trade,growth
But,sluggishfarmsectorgrowthandthesharpslowdownin rural in agricultural productivity has slowed and investment remains
employmentgains in the latterhalf of the 1990s is a constraint weak. A potential explanation for these apparentlycontradictory
to sustaininghigh rates of overall economic growth, and to trends lies in the performance of India's agricultural policies.
achievingrural-urban and regionalbalancein economicgains.
Well-endowedregions,includingthosewithbetterinfrastructure Ill
andgovernance,havetendedto registerrelativelystronggrowth MajorAgricultural Policies
comparedwith some others,includingheavilypopulatedstates
suchas UttarPradeshandBihar.Thesedisparitiesmaystemless India's majordomestic agriculturalpolicy instrumentsinclude
fromreformsthathave been undertaken,ratherthanthose that a system of minimum support prices for major crops, input
have not, but regional imbalancesare a concern in India's subsidies on fertiliser, power, and irrigation water, and public
democraticpolitythat,perhapsparadoxically,becomesan argu- investments in surface, and to a lesser extent, groundwater ir-
ment to slow furtherreform. rigation. Historically, these interventions have been accompa-
Factorson boththe supplyanddemandsides havecontributed nied by border measures, including quantitative restrictions on
to sluggishfarmsectorgrowth.Lookingfirstat thedemandside, imports and exports, import tariffs, and state trading. The border
we have seen thatdomesticdemandhas certainlybeen thereto measures were applied in various combinations to different
supportstrongerperformanceby thesector.Agricultural exports, commodities but, except for traditionalexport crops such as tea,
whichnowaccountfor6-7 percentof farmoutput,also strength- coffee, cashews, and spices, traditionallyisolated Indian markets
ened duringthe 1990scomparedwith the 1980s, drivenlargely from world markets. In addition, until the 1991 devaluation, an
bygainsin nontraditional items,suchas cereals,oil cakes,cotton, overvalued rupee imposed roughly a 20 per cent tax on domestic
andmarineproducts(Table2). Theseexports,however,weakened production.
substantiallyduring1997-98-2001-02,reflectinginternalsupply The impacts of these policies on Indian agriculture have been
anddemandconditions,as wellas competitionanddecliningprices documented in a number of studies [Gulati and Narayanan2003;
in worldmarkets.But,even if decliningworldprices- resulting Gulati and Kelley 1999; US Department of Agriculture 1999]
partlyfrompolicies in othercountries- have had a dampening which indicate that, when all commodities are treatedas imports,
influence on Indian exports, the domestic marketdominates aggregate farmoutputhas been taxed by this policy regime during
demandand has provideda strong impetusfor expansion. 1986-2002 (Figure 3).2 Outlays on price supports and input
On the supplyside, sluggishgrowthin farmoutputhas been
associatedwithconflictingtrendsin productivityandinvestment. Table 2: Trends in India's AgriculturalExports
Ontheone hand,growthin productivity(yields)has slowedand, Period Real Agricultural
Exports(Per Cent)
on the other,relativeprice incentivesfor agriculturehave im- Total Comp1 Other
provedand there has been somewhatfaster growthin private Growthrates
agricultural investment.But,despitethesomewhathigherinvest- 1982-92 5.2 5.9 4.7
mentgrowth,perhapsthe key pointsto be takenfromthesedata 1992-91 7.3 7.3 7.2
are that privateinvestmentin agricultureremainsnoticeably 1992-97 1997-01
14.7
-1.3
19.1
-5.8
11.0
2.7
lower thanin the rest of the economy and growingmuchmore
slowly.Anotherimportantissue, of course,is thegenerallyweak Note: tobacco,
(1) Exportscompetitivewith developed countries (cereals, cotton,
meats and preps, oilmeal, animaland vegetable oils, and
performancein public agriculturalinvestmentin the 1990s, otherfood and live animals).
implyingadeclineinhistoricallyproductiveinvestmentin surface Source: EconomicSurvey,Gol, variousissues.
irrigationsystems.Privateinvestment,whilegrowingfasterthan
public investmentand now accountingfor the largershareof Table 3: Trends in Public and Private GFCF
in and for Agriculture
capitalformationin the sector,also slowed comparedwith the (Per cent)
1980s (Table 3).
Pricetrendsin the domesticmarketsuggest thatprice policy Period Public Private Total
has also played a role in sector performance.In concertwith Growthrate*
highersupportprices,Indianfoodgrainpricesrose in realterms 1982-92 -2.5 5.2 1.6
the from the 1992-99 0.8 3.5 2.3
during 1990s, shifting historical
pattern of constant 1992-97 1.5 4.2 2.8
or declining real prices and holding resources in foodgrain 1997-99 -1.1 1.8 1.1
production.In contrast,growthin real prices for the sector as Shares of agriculturalGDP
a wholeactuallyslowedin the 1990s,suggestingthat,apartfrom 1981-83 average 10.3 8.6 19.0
1991-93 average 5.9 10.4 16.3
foodgrains,thesectormaybe doinga reasonablejob of adjusting 1996-98 average 5.4 10.4 15.8
todiversifyingdemand.But,India's risingrealcommodityprices, 1998-2000 average 5.0 10.3 15.3
whetherfor foodgrainsor otherfoods, are sharplyat odds with *Growthrates between 3-year averages centredon
years indicated.
long termglobaltrends.Real worldpricesforcommoditiessuch Source:Ministryof Agriculture,Gol.

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 Figure 3: Aggregate Producer Support Estimates for India
20
-40 - -
-.60
0 L
- -100
-120.............I
coD - 0 C o0 Cj c T LO
Co 0Co ) O O 0'
c cc c0
cc c)
cc cc ac0c
c c0c co o o
Source:Gulatiand Narayanan2003.
subsidies are large, but the impacts of these measures have
typically been more than offset by relatively low domestic farm-
gate prices that prevail due to quantitative import and export
restrictionsand high marketing costs. Although some commodi-
ties, particularlyoilseeds, have been fairly consistently protected
(subsidised), and others have been protected in occasional market
conditions, the sector as a whole has been taxed, even following
the 1991 devaluation. More recent protection estimates show that,
through a combination of rising budgetary subsidies and smaller
gaps between domestic and world prices, the taxation of Indian
agriculturehas declined significantly. When the majorcommodi-
ties are treated as exportables - and relative prices are compared
at the border rather than the farm gate - protection even turns
positive for 2001 and 2002.
An additional set of domestic policies affecting agriculture is,
however, not directly accounted for in the above protection
measures but are, perhaps, increasingly importantin their impact
on the sector's adjustment to expanding demand. A partial list.
-The Essential Commodities Act (ECA), enacted afterthe Bengal
Famine but still in force in the 1990s, empowers central and state
governments to impose restrictions on the storage and movement
of commodities, such as foodgrains, pulses, and edible oils, thus
limiting the scope for private investment in these markets.
- Until recently, all food-processing industries were limited to
small-scale capacities and, despite deregulation, small-scale, low
technology firms established under the old laws still dominate
the industry. Some products are still restricted to small-scale
firms, and food-processing units still require approval from eight
central government ministries.
- Agricultural Produce Marketing Committee (APMC) regula-
tions requireagriculturalsales to occur only in regulated markets,
limiting private investment in market activities, as well as in-
tegration of producers with the marketing chain.
- Weak laws providing insufficient protection for lessors and
lessees limit use of land leasing to assemble larger, more efficient
operational units, and limit private investment to improve agri-
cultural land.
Although most of these issues have been the targetof discussion
and some action by the central government, there has been little
actual implementationof reform. State governments, which must
accept and implement any changes, have been reluctant to act
on central government reform recommendations. These regula-
tions impose costs on the agricultural marketing and processing
industries and additional taxes on farm output, as well as
3614
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weakening the environment for private investment that could
boost efficiency and employment.
IV
PolicyPerformance
Agricultural
None of India's domestic support policies faced discipline as
a result of the Uruguay Round Agreement on Agriculture. As
notified to the WTO, India's Aggregate Measure of Support
(AMS) shows negative aggregate support through the 1990s.
Input subsidies are notified by India as support to small, resource
poor farmers that is exempt under the URAA. Similarly, expen-
ditures under the "foodgrain subsidy" are notified as domestic
food aid and not counted as producer support.
The market access disciplines of the URAA that required
I(D r-t O c 0
c) co
o cc o o o0 "tariffication"of agricultural imports, together with India's loss
of its WTO balance of payments waiver in 1997, did lead to
changes in India's border policies for agricultural products.
Changes, completed in April 2001, included the removal of
quantitative import restrictions and establishment of tariffs for
all agriculturalimports. For major commodities, however, tariff
bindings are sufficiently high to prevent imports, although some
imports of high-value and processed items (fruits, nuts, canned
goods, etc) are now occurring at bound rates. In most cases where
significant imports have occurred, such as edible oils, pulses,
and cotton, it is because of a unilateral GoI decision to set applied
rates below bound rates. For a few commodities, including
oilseeds (phyto-sanitary regulation) and corn (tariff rate-quota
administration), non-tariff barriers likely prevent trade at bound
rates even when market price conditions are favourable.
There are several importantareas of agriculturalpolicy during
the 1990s that are instructive to analyse in terms of performance
and alternatives for reform.
- Grain producer price policy
- Removal of export restraints
- Protection of oilseeds and oils
- Market and regulatory reform
Grain Producer Price Policy
The most observable recent development in Indian agriculture
was the accumulation of large government surpluses of wheat
and rice, including the emergence of significant - and subsidised
- exports of these commodities. The stockpiles and exports
occurred alongside rising real domestic wheat and rice prices and
actual declines in per capita consumption, even as roughly 260
million Indianscontinue to live in poverty.Addressingthis perverse
set of outcomes is a major challenge to Indian policy-makers.
The surpluses emerged in the context of secular changes in con-
sumerdemand, together with changes in producerprice and public
distributionpolicies. Thereis good evidence thataggregatedemand
is shifting away from wheat and rice. Although there is contro-
versy on this issue, analyses of consumer demand based on
NationalSampleSurveydata[Kumar2001 a] suggestthat,while low
income groups still show positive income elasticities of demand
for cereals, but those for the population as a whole are near zero.
Nationalminimumsupportprices(MSPs) forfoodgrainsand other
major commodities are recommended by the Commission for
Agricultural Costs and Prices (CACP), but are actually set by a
committee chairedby the primeminister.CACP recommendations
are based on several factors, but assessments of costs of pro-
duction (COP) and domestic and global marketconditions appear
key. Historically, the MSPs for wheat and rice were generally
Economic and Political Weekly August 7, 2004
 Figure 4: Indian Wheat Support Price, Production Costs An important factoraffectingMSPpolicyin the 1990sconcerns
and World Price
the changing political dimensions of the policy when India
250 - - - - - - - - - - - - - - - - - - - - - - - - - - - - enteredan era of coalition governmentsand the farm lobby
225 ... . becamemoreinfluential.During1995-96- 2001-02,just before
, 200- - - - - - - - - - - - - - -- - - - - and duringthe accumulationof surpluses,the governmentset
\~
MSPs above the CACP recommendationin four out of seven
1 5. . . . .... . . .. , . . . . .
yearsfor rice andfive out of seven yearsfor wheat[Parikh2002
et al]. Anotherkey dimensionis thatthe MSPmechanismis one
of the few leversavailableto Indianpolicy-makersand thereis
a tendencyto try to use it to achieve multiplepolicy goals,
175.I -- - MSP (official) - - World(US) includingboth price stabilisationand income support.
The failureof price policy to successfullyadaptto the new
50 -., .-.,-,---".-, , . l . _.".-.'.' .' environmenthas had a numberof impacts.First,breakingwith
thehistoricalpattern,domesticwheatandricepriceshavetended
to strengthenrelativeto bothworldanddomesticprices,andto
move above domesticmarketclearinglevels (Figure5). While
-0 I- COP(Punjab) MSP(shadow) benefitingthe relativelyfew producersreceivingwheatandrice
Note: MSP(official)based on officialexchange rate,whichwas 20-30 per MSPs, higherconsumerprices have undoubtedlyhad negative
cent overvaluedduring1980-81-1990-91. MSP(shadow)based on impacts.Per capita wheat and rice consumptionhas actually
shadow exchange rates. declined in recent years, as higher procurementand prices
Sources: Ministryof Agriculture,
Gol;US Departmentof Agriculture,
Economic contributedto declinesin consumptionof open marketsupplies
Research Service.
that have not been offset by subsidiseddistribution.A recent
Figure 5 Trends in Wholesale Prices in India
studyof the economywideimpactsof increasingthe wheatand
Allcommodities -
riceMSPswhentheyareabovemarketclearinglevels foundthat
.
reducedconsumptionand investmentassociated with higher
All food - .
pricesactuallyreducedincomes,bothin aggregateandfor most
Meat,fish and eggs ruraland urbanincome groups [Parikhet al 2002].3
Vegetables Second,bymaintaining highprices,thegovernmenthasbecome
Fruits - _ I '
responsibleforthestorageandtransportof mostof the marketed
Milk _
[ 81-91 surplusof FAQ-gradewheatandrice in thecountry-what some
, ,
.91-00 observershavetermeda "defactonationalisation"
Edibleoil of graintrade.
Pulses
In additionto raisingbudgetarycosts, the policy provideslittle
incentivefor privateinvestmentin grain storage,handling,or
Rice --- ,,,,i' distribution,with the exceptionof the fees traderscan earn in
Wheat l__ -- the exportof subsidisedgrain allocatedby the government.
2.00.0 4.0 6.0 8.0 10.0 Third,by focusing on supportingrelativelyhigh pricesonly
GrowthRate (Per Cent) for wheatand rice in a few regions,MSP policy has not been
Source:Ministryof Commerce,Gol. made an effective tool for stabilisingproducerpricesfor other
crops and supportingthe diversificationof agriculture.
increased at ratesbelow inflation, and remained well underimport Fourth,the budgetarycost of FCI operationsundercurrent
parityprices.Althoughintendedto be a nationalprogrammecovering policies has now reached about $5.5 billion. When policies
all majorcrops,the MSPs aregenerally defended by GoI purchases
supportdomestic prices above marketclearing, much of this
only for wheat and rice in the major surplus areas of Punjab, subsidyaccruesto producersratherthanconsumers.Combined
Haryana,western UttarPradesh, and Andhra Pradesh (rice only). withthecostof subsidiesonfertiliserandotherinputs,thesubsidy
Beginning in the late-1990s, the MSPs set for wheat and rice bill has burgeonedto about$15 billion annually,far exceeding
became increasingly out of step with domestic marketconditions. bothpublic($1 billionin 2001-02)andprivate($2.8billion)capital
One key factor was (and still is) that the COP concept used in formationin agriculture.Subsidyoutlaysarecrowdingout new
setting the price became a "full cost" measure that, in addition investmentneededto boostproductivity andmarketing
to variable input costs, included the rental value of land, the efficiency.
Finally,the policy of maintaininghigh wheatand rice prices
imputed value of family labour, and a return to management. hascontributed toemergentenvironmental problems,particularly
Another was pressure to compensate farmers for the price swings associated with the intensive wheat-ricecropping system in
associated with changes in India's rice and wheat export policy northernIndia.Whencombinedwith the low cost of irrigation
during 1995 and 1996. For rice, higher market prices resulting water- muchof which is eitherfree, stolen,or subsidised- the
from the initial removal of export restraintslater created pressure
strongpriceincentivesfor wheatandrice arecontributingto the
for higher MSPs when world prices fell. Similarly for wheat,
rapiddeterioration of groundwater resources,andrisingconcern
lower marketprices following the re-imposition export restraints with deterioratingsoil fertilityin some areas.
led the government to compensate farmers with higher MSPs.
With these developments, the MSPs became disconnected from
domestic market conditions and - when world prices fell from Removal of Export Restraints
a temporary spike in 1996-97 - from competitive world market
Throughthe 1980s and early 1990s, Indianagriculturewas
prices (Figure 4). The tendency for MSPs to be increased has burdenedwith export restrictionsand overvalued exchange
likely been compounded as MSP benefits boost land rental, ratesthatresultedin net taxationof the sector.Exportsof agri-
labour,and managementcosts, thus leading to higherCOP. culturalgoodswererestrictedthroughmyriadcontrols,including

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 Figure 6: Rice Trade and Protection in India beginning to stimulate market integration or coordination
1.6 - - .- .- .- .- .- .- .- .- .- -.- - - - -
- -.. - - - - - - - 5.0 between exporters,millers, and contractproducersin orderto
4.9 5.0 ensurequality [Bhatt2004; Roy 2002].
-4.0
With these potentiallypositive impacts on investmentand
competitiveness,theremovalof exportrestraintsopensupa new
setof policyissuesconcerningtheimpactsof globalpricechanges
0
o0 0.9 0.9
7 09.
on thedomesticmarket.First,theremovalof riceexportrestraints
0.5 1.0 2:
- 70.5
initiallybenefitedproducersandtraderswhenit pulleddomestic
C Net Exports -Importable -0.4 05E - e pricesabovetheMSP.But,whenworldpricesretreated,theMSPs
'0.84I c becamedisconnectedfrommarketrealities,leadingto increases
c~~~~~~~~~a" in domesticand exportsubsidycosts. Thus, with the removal
x~~~~~~-.
-C 0.6 -2.0.. of exportrestraints,it becomesimportantto haveanMSPsetting
mechanism(and discipline)that keeps MSPs connectedwith
0.2 ' ~ ~ ~.4 domesticand world prices.
Second,sinceanimportant rationaleforrestraining
exportswas
0,2 - -5.0 to ensurestabledomesticconsumerprices,theremovalof export
o
oo o') C) oa) o' restraintsmay increaseperiodicdemandson domesticdistribu-
tionprogrammes to stabilisesuppliesfor lower-incomeconsum-
C- NetExports -s- Importable -9? Exportable ers. The recenthigherdomesticpricesanddeclinesin percapita
(in million tonnes) Hypothesis Hypothesis
exportprices, for the sake of domestic food security. For a number rice consumption suggestthatat leastsomeconsumershavebeen
Source:Gulati
Source: Gulatiand and Mullen 2003.
Mullen 2003. adverselyaffected.However,since globalrice priceshavebeen
declining since the mid-1990s, these impactsare more likely
prohibitions,licenses, quotas, marketing controls and minimum drivenby highMSPsanddeclinesin distribution associatedwith
export prices, for the sake of domestic food security. For a number implementation of theTargetedPublicDistributionSystem,than
of products, the quantitative controls on exports were admin- by the removalof exportrestraints.
istered through trading enterprises in the public and cooperative
sectors.
Import Protection: Case of Oilseeds and Oils
Agricultural export policies began to change in 1994 and,
barringthe occasional reversal,have been progressively liberalised. Althoughthe1991-93economicreformssubstantially liberalised
The ministryof commerce, throughthe directorgeneral of foreign India'sexternaltraderegimefor manynon-agricultural goods,
trade, imposes or removes export restrictions in order to promote progressin phasingout quantitativerestrictionson agricultural
exports while also ensuring 'adequate' domestic supplies of productsremainedslow. Exceptfor the liberalisationof import
essential commodities at 'reasonable' prices. Reforms have licensingon sugarandcottonin 1994,mostagricultural products
included reductions in products subject to state trading,relaxation remainedsubjectto importcontrols.In 1997, followingthe loss
of export quotas, the abolition of minimum export prices, and of thebalance-of-payments waiver,Indiaphasedoutquantitative
increased credit availability for exports. In 2000, India also began importrestrictionsand QRs were finally lifted in April 2001.
to provide significant budgetary subsidies to support exports of Despitethe fearsof Indianpolicy-makers,the largeanticipated
surplus cereals when the combination of declining world prices surgein farmimportsdid not materialise.Importsincreasedin
and higher domestic prices make Indian wheat and rice some categories,includinghigh-valueandprocesseditemswith
uncompetitive in world markets. tariffsof 50-100 percent,butnot to levels thatposedsignificant
Developments in the Indian rice market since the removal of threatsto domestic producers.
export restraints may be indicative of the impacts of this type Oilseedsandproductsarea majorsectorof domesticproduc-
of reform (Figure 6). Private traders were permitted to export tion andconsumptionthathas, perhaps,been the most affected
common rice beginning in 1994-95 and, although exports remain by importliberalisation policyduringthe 1990s(Figure7). Trade
small relative to production, India immediately became a major policy changesin the sectorhave, however,been mostlyunilat-
player, selling primarily into the lower end of the international eral,ratherthanmandatedby URAA disciplines.Until 1993-94,
market.Since 2000-01, however, the combination of lower world all edible oil imports were controlledby the State Trading
prices and firm domestic prices has made Indian rice exports less Corporation, whichbasedimportdecisionson domesticmarket
price-competitive, leading to GoI subsidies for rice exports. conditionsandotherpolicy goals. Importswerereducedsharply
Rice exports have helped moderate the growth of surplus rice during1987-93,asthegovernmentattemptedto boostproduction
stocks and, together with higher MSPs and lower domestic incentivesand adoptionof moderntechnology.
distribution of subsidised rice, contributed to a strengthening of In 1993-94, the governmentabandonedthis approachand
domestic prices. The growth in exports, along with relaxation openedimportsto privatetraders,subjectonly to tariffswhich
of earlier policies limiting rice milling to small-scale enterprises, were set well below boundrates.Importspicked up
slowly at
are stimulating investment in moder rice milling and grading first,but surgedin the late 1990s, eventuallymakingIndiathe
equipment. The opening up of exports exposed the inefficiency world's largestimporter.Tariffsfor most oils have now been
of domestic rice marketing and processing infrastructure,and the raisedto 65-85 percent, butare still well below the boundrates
absence of quality and grading standards, needed to compete in of 300 percent.Hikesin thetariffon palmoil, themajor
imported
world markets. Although the bulk of India's rice continues to oil, as well as rapeseedand sunfloweroils, are constrained
by
be processed in inefficient, small-scale mills with no formal the relativelylow 45 per cent bound rate for soybeanoil, the
grading standards,the basmati rice export business, in particular, secondlargestimportedoil. Despitethe tariffs,oil importshave
has sparkedinvestmentin bettertechnologyfor processingand continuedto expand, now accountingfor 45-50 per cent of
grading.In some cases, the basmatiexport business is also domesticoil consumption.

3616 Economic and Political Weekly August 7, 2004

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All use subject to JSTOR Terms and Conditions
 Figure 7: Edible Oil Imports and Tariffs in India remunerativeand stable prices directly to growers. There is
8.0 150 evidencethatthecurrentapproachof taxingoil importsprimarily
7.0 benefitsoilseed processorsand traders,with only a portionof
i6"
=
.
^
*e t
125 the protectionactuallybenefitingoilseed growers [Gulatiand
c C 6.0-%
S

r- C:
?%' ^
C
Kelley1999;Figure8]. Evenin a veryefficientandfullyintegrated
'"' 5.0 "- . ,'
marketthebenefitto oilseedgrowersof a tariffon oils is limited
.2 ) . . " 75 0.
C to the rateof oil extractionfrom the seed, rangingfrom about
4.0 QR 75
o
00'8 ftll___ ..e',517 18 per cent in the case of soyabeanto about45 per cent for
sunflowerseed.With the domestic processing industryoper-
CO O0 .( 30 3 atingforonly three-fourmonthsof theyear,oilseedprocurement
operationswouldentailonly short-termgovernment stockholding.
i.0 Anotheroptionis to ease restrictionson oilseed importsand
0.0 1 0O on the scale of domestic processing facilities to foster the
to
co co 0
aco co o o-
co . , D 'n 0 o ax CO) 0 developmentof a moreefficient,verticallyintegrateddomestic
-) 0) a) 0 0 a ) 0) ) 0) 0
processingandmarketingindustry.Inadequatescale, poortech-
I Imports- TariffRate - - - International Price (Palm Oil) nology, and low potentialto boost capacity utilisationfrom
Source:Gulatiand Mullen2003. domesticraw materialsnow make most of India's processing
capacityfragmented,inefficientby world standards,and inca-
Figure 8: Competitiveness of Oilseed Production pable of producingqualityoil and feed protein.An alternate
and Oil Processing in India
scenario,requiringcoordinationof oilseed and oil tariffsand a
solutionto currentnon-tariffbarriersto oilseed imports,might
Rapeseed-
mustard allow processorsto importoilseedsandboostcapacityuse, thus
making investmentsin more efficient, integratedunits more
economicallyviable. A more efficient and dynamic industry
Sunflower wouldyield benefitsfor bothproducersandconsumers,as well
oil
IEdible as anenvironmentmoreconduciveto privateinvestmentto boost
'*|~ :~-^* ~' ~Oilseeds
?~ ~ local oilseed production.
Groundnut
Market and Regulatory Reform

Soyabean
India'sdomesticagriculturalmarketsandprocessingindustry
have,historically,beensubjectto a virtualthicketof regulation,
initially intendedto protect consumersand promote labour-
0.0
0.5 1.0 1.5 2.0 2.5 intensive industry,but also severely limiting the viability of
NominalProtectionCoefficients,1990-95 Average
employment-generating private investment.Several of these
Source:Gulatiand Kelley1999. regulatory issuesarelistedin theabovediscussionof agricultural
policy.Recently,however,initialstepshavebeentakentoliberalise
The swings in edible oil importpolicy have clearly had an domesticagriculturalmarkets.Among these changesare:
impact on domestic production,consumption,and prices of - The temporaryremovalof licensing requirements,stocking
oilseedsandoils. Importrestraintsduring1987-93led to higher limits,and movementrestrictionsfor wheat,paddy/rice,coarse
domesticoil and oilseed prices,leadingto increasesin planted grains,edible oilseeds and edible oils underthe ECA by some,
area and yields. Since 1994, with reducedprotectionfor oils, but not all, state governments.
and the lack of a procurementmechanismto defendMSPs for - GoI removalof plantscale restrictionsand licensingrequire-
oilseeds,oilseed areahas tendedto decline and yield growthto ments for most food processingactivities.
stagnate[Kumar2001b; Gulatiand Kelley]. Also, chronically - GoI removal of the restrictionson futures tradingon 54
low capacityutilisationratesin the oilseed processingindustry commodities,includingwheat, rice, oilseeds and pulses.
have fallen even lower. On the consumptionside, however, - Gol reformof the milk and milk productsorderto no longer
consumershave benefitedfrom lower real domesticoil prices restrictlarge-scaleinvestmentsin new processingcapacity.
and significantgains in per capita consumptionsince 1993. In addition,the GoI has proposed,for the considerationof the
The overallwelfareimplicationsof the changesin oil import states,revisionsto the APMCAct thatwouldpermitthe devel-
policy have not been analysed.Farmersand oilseed processors opmentof privatemarketsand is, reportedly,workingon legal
regularlylobbyfor restrictionson oil imports,andsome policy- changesto facilitatelandleasingandcontractfarming.Another
makershavebeenlookingfornon-tariff restrictions
togetaroundthe important reformunderconsiderationis to streamlinefoodsafety
low 45-percentboundratefor soyabeanoil so thattheycanhave laws,includingconsolidationof responsibilitiesandjurisdiction,
moreflexibilityto raisetheratesforpalmandotheroils [Chandra- as well as closer alignmentwith internationalstandards.
shekhar2002]. Oilseed processorsalso lobby periodicallyfor These proposedreformsare likely to help improvethe envi-
freerimportsof oilseeds and lower duties on crudevs refined ronmentforprivateinvestment,structural change,andefficiency
oils, inorderto boostcapacityutilisationin crushingandrefining. gainsin agribusinessthatcouldyieldsubstantialbenefitsstreams
Largelyunanalysedare variouspolicy optionsfor improving to Indianproducersandconsumers,andboostruralemployment.
the competitivenessof the domestic oilseed and productsin- Estimatesof currentmarketingcosts in the agriculturalsector
dustry.One optionis to shift fromrelianceon oil importtariffs indicatethe potentialfor efficiency gains:
as the tool for intervention,to an MSP programmethatdefends - Inthecaseof vegetables,mostof whicharemarketedwithlittle
oilseed pricesthroughgovernmentpurchasesand,thus,assures grading,packaging,processingor otherformof valueaddition,

Economicand PoliticalWeekly August 7, 2004 3617

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All use subject to JSTOR Terms and Conditions
 Figure9: PoultryProducerPrices and RetailMarginsin India
80 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70 - -- - -
50 L-
540 --
30 -- 'T - -
20 - -
10 - - - -
North West , C th
Source:Landes and Persaud. B Producerpriceo Producer-retail
margin
farmersreceive about 25 per cent of the consumerprice, and
losses in the supplychain are roughly40 per cent (McKinsey).
- For wheat,most of which is sold to consumerswithoutvalue
addition,producer-to-retail marketingcosts also appearhigh,
particularly if the costs of governmentoperationsare included.
Estimatesbasedon GoI,FCI,andWorldBankdataindicatetotal
producer-to-consumer marginfor wheatof aboutRs 4,850 per
tonne, or 80 per cent of the producerprice (USDA).
- In southernand western India, vertically integratedbroiler
operations are reducing production costs among contract
growers, andefficiencygains in the formof reducedproducer-
consumermarginsappearsignificant.Producersare benefiting
fromreducedmarketingriskandassuredreturns,whileconsum-
ers gain from lower prices (USDA; Figure9).
- Sincethe removalof quantitativeimportrestrictions,imported
processedfoodsarenowseen in manyurbanstores,despitetariffs
of50-60percent.Typically,however,thebulkof themarginbetween
the portandthe consumeris not due to the tariff,butto the high
marginstakenby importers,wholesalersand retailers(USDA).
Followingthroughon marketingandregulatoryreformappears
to be criticalto the emergenceof a moredynamicand efficient
agribusinesssector drivenby privateinvestment.Anotherpo-
tentiallysignificantchangenow occurringin some urbanareas
is the emergenceof largescale, chainwholesalingandretailing
enterpriseswithinvestmentfromeitherdomesticorforeignfirms.
Inothercountries,theemergenceof largescaleandchainretailing
has been a key to the developmentof moreefficient, vertically
integratedsupplychains.This phenomenonhas the potentialto
be an importantdevelopmentin India,as well, althoughcurrent
rules againstFDI in retailingis likely to slow its growth.It is
unclearwhetherthe recent and proposedreformswill be suf-
ficient to sparkincreasedprivatedomesticand foreign invest-
ment,orif additionalreformsand/orpublicinfrastructure invest-
ments will be needed to improvethe investmentclimate.
V returninvestmentsin technology, markets,andinfrastructure.
ShapingReformAgenda
Consensus-building for changein agriculturalpolicy has been
very difficultin India.Thereis a greatdeal of inertiain current
policies and institutions,in partbecauseof the belief thatthese
policies have served India well in achieving foodgrainself-
sufficiency,butalso becausethey have createdpowerfulvested
interests.Perhapsmore importantly,with the farm sector the
sourceof 25 per cent of GDP, and of income for about65 per
3618
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All use subject to JSTOR Terms and Conditions
cent of the population,there is a deep-rootedbelief that the
welfareof the poor is linked closely to the protectionof agri-
culture. In India's era of coalition governments,it has been
- - - - increasinglydifficult for policy-makersto take risks on agri-
culturalpolicy reformthat would entail short-runadjustment
costs- eithereconomicorpolitical.Althoughthereis a significant
and growingreform-mindedconstituency,there is little doubt
thatthe largelydefensivepositionstakenby Indiain the recent
Cancunministerialhave been popularin India.
Tomoveforward,it wouldappearimportant toforgerecognition
andagreementon severalbroaddirectionsforthereformagenda:
- - Pricepolicy: As long as producerpricepolicy attemptsto meet
both incomeand price stabilisationgoals, it will be difficultto
containitscosts,orto servetheefficientallocationof resourcesin
thesector.Inthecontextof market-orientedreformandamoreopen
traderegime,it will be importantfor price policy to take more
explicit accountof domesticand worldprice conditions,rather
thanameasureof production costs.Extensionof effectiveproducer
pricestabilisationto cropsotherthanwheatand rice could help
promoteboth sector diversificationand income stability.For
incomesupport,otherpolicyinstruments, includingtargetedfood
distributionandactuariallysoundcropinsuranceproducts,may
providesupportwith lower cost and less marketdistortion.
Exportrestraints:The removalof restraintson exports is an
importantstepin reducingthe traditionalimplicittaxationof the
agriculturalsector.The removalof suchconstraintscanpromote
beneficialprivateinvestmentandemploymentin thesupplychain
for internationallycompetitivecommodities.To be sustained,
however, free exports will require consumer and business
acceptanceof the influenceof world price fluctuationsin the
domesticmarket,and in adjustingpolicy prices.In the case of
food staples,low-incomeconsumersmay need continuedpro-
tectionfromany upswingsin worldanddomesticpricesthrough
currentor enhancedfood distributionprogrammes.
Import liberalisation/protection: Concerns with the market
distortingpolicies of othercountriesshouldnot preventimple-
mentation of economically beneficial import liberalisation
measures.The removalof quantitativeimportrestrictionshas
generallyhad negligibleimpacton producers,while providing
benefits to consumers. In some sectors, such as oilseeds,
liberalisationcould lead to additionalgains for consumers,
producers,and processors- not to mentionemploymentgains
- by facilitatingdevelopmentof moreefficient processingand
marketing.Importliberalisationanddomesticderegulationhave
benefitedmanynon-agricultural industriesandconsumerssince
1991-93, why not agriculture?
Public investment:The inability to reform price policy and
containinputsubsidieshasled to a declinein publicinvestmentin
agricultureata timewheninvestmentin newtechnology,infrast-
ructure,andinstitutionsis needed.EventhoughIndia'ssubsidies
havenotbeenchallengedundercurrentWTOrules,their with-
draw would provide a large pool of resources with which to
compensateproducersfor pricepolicy reformthroughhigher-
Privateinvestment:Publicinvestmentcannotbe expectedto fill
theinvestmentgapinagriculture. Improvingtheclimatefor private
investmentand employmentin marketsfor agriculturalinputs
and outputs is, therefore, essential for boosting the growth
and competitiveness of an increasingly diverse agricultural
sector. Stimulatingprivatedomestic and foreign agribusiness
investmentwill requirepublicinvestmentsin marketinfrastruc-
ture,supportiveimportand exportpolicies, andcomprehensive
'behindtheborder'reformsof marketregulationsandinstitutions.
Economicand Political Weekly August 7, 2004
 VI The Hindu Business Line (Online). http:www.blonnet.com/2004/02/03/
stories/2004020301521100.htm, February 3, 2004.
AnalyticalNeeds Bijapurkar,R (2003): 'The New ImprovedIndianConsumer'Business World
(Online). Available at http//:www.businessworldindia.co/Dec0803/
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be several important analytical gaps to be filled. First, while Chandrashekhar,G (2002): 'TradePerturbedover ProposedCurbson Soya
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